End of Year Tax Strategies

[klarmaniac]

Earlier this year I realized a large short-term gain. (I generally don't have short-term gains but I followed Seth Klarman into IDIX which was then acquired.) I expected to have losses during the year to offset it with, but with the market continuing to go up, I don't. I'd prefer not to pay the higher short-term gains tax rate, so before the month ends I'd like to open two positions which will move in almost exactly opposite directions, sell the one that's at a loss on 12/31 and the one that's at a gain on 1/2.

The first question is, is this legal? (I'm in the U.S.) I'm pretty sure the answer is yes.

The second question is, what would work best (easy + cheap + safe)? I think at-the-money call and put options on the same underlying would have high transaction fees and wouldn't necessarily move exactly opposite. A better idea might be to buy both sector ETFs and the inverse ETFs for those same sectors. I know the inverse ETFs lag over time but if I only hold for a couple weeks the expected cost would be small. I'd probably avoid 2x and 3x ETFs because they lag a lot more.

I also may open small positions in numerous stocks that I like anyway, and sell the ones that are at a loss on 12/31, but I don't see any bargains anywhere that I don't already have in my portfolio, and for the ones I'm already holding I can't buy more shares and quickly sell those at a loss, due to the wash sale rule.

Dividend stripping wouldn't work because if I sell before holding 60 days it would be taxed at ordinary income rates.

I'm a long term buy-and-hold value investor so all of these trading strategies are outside my circle of competence.

Any ideas or opinions would be very much appreciated :)

[ERICOPOLY]

IRS lingo is "sham".

[klarmaniac]

Oh, I thought it was legal... if it's not I certainly won't do it. Thank you

[oddballstocks]

Maybe I'm a little off my rocker here, but why are you intentionally trying to create a loss? 

 

So you made some money, congrats, that's a good thing right?  Yes, you have to pay taxes, but you made money.

 

Now you want to lose an equal amount of money so you don't have to pay taxes.  I'm not sure I get it, if you do this you won't have any taxes, but you also won't have any gains either.  So you gave Uncle Sam the finger, but the result is you earned no money.

 

So many investors let the tax-tail wag the dog.  If you're that concerned about taxes invest in a tax-deferred account.  You can invest $17k in a 401k, plus another $5k in an IRA and $8k (?) in an HSA.  If you're married you can double this.  If you own your own business you can sock away $42k a year in a 401k, employ your wife and it's $82k a year, plus double all of the other values.  That's plenty of tax deferred space for short term trades.

[thepupil]

I'm not exactly endorsing it and would provide the disclaimer that I have no expertise in the matter. But you may want to consider going long and short very highly correlated (BUT NOT IDENTICAL) pairs of securities such as the below and then closing out the losers on the last day of the year (creating losses) and closing out the winners the 1st day of the new year (creating gains). You then have all of 2015 to offset those gains with your normal portfolio.

 

 

IWO / IWM Russell 2000 Growth and Russell 2000, not identical but pretty close and they move and groove together

YHOO / BABA  <---i have this trade on as an investment, not for tax purposes, you obviously have risks here and in alll the correlations

Naspers / Tencent

EMC / VMW

L / (CNA+DO+BWP)

Share classes (this may be too identical, you'd have to do more research) Lennar A/B, a bunch of european companies, GOOGL and GOOG

Dual Listings (may be too identical)

 

I think slightly different indices where your basis risk is minimized is the way to go. Also you could buy SPY and short the sector ETF's in corresponding weight to the index.

 

EDIT: I don't mean to imply that this strategy is risk free and I think if you get too aggressive with it you are opening yourself up to issues, but if i was going to do it, that's how i would do it.

 

[oddballstocks]

I'm not exactly endorsing it and would provide the disclaimer that I have no expertise in the matter. But you may want to consider going long and short very highly correlated (BUT NOT IDENTICAL) pairs of securities such as the below and then closing out the losers on the last day of the year (creating losses) and closing out the winners the 1st day of the new year (creating gains). You then have all of 2015 to offset those gains with your normal portfolio.

 

 

IWO / IWM Russell 2000 Growth and Russell 2000, not identical but pretty close and they move and groove together

YHOO / BABA  <---i have this trade on as an investment, not for tax purposes, you obviously have risks here and in alll the correlations

Naspers / Tencent

EMC / VMW

L / (CNA+DO+BWP)

Share classes (this may be too identical, you'd have to do more research) Lennar A/B, a bunch of european companies, GOOGL and GOOG

Dual Listings (may be too identical)

 

I think slightly different indices where your basis risk is minimized is the way to go. Also you could buy SPY and short the sector ETF's in corresponding weight to the index.

 

EDIT: I don't mean to imply that this strategy is risk free and I think if you get too aggressive with it you are opening yourself up to issues, but if i was going to do it, that's how i would do it.

 

Smarter minds prevail...this seems like a good approach if you're trying to generate losses.

[thepupil]

the problem is though to generate substantial losses as a percentage of NAV, you'd have to get pretty levered and you are wearing one side of the trade overnight (in between when you close out the winners and losers). I could see it going terribly wrong (in a very low probability scenario). And I could also see it working perfectly.

[Hielko]

the problem is though to generate substantial losses as a percentage of NAV, you'd have to get pretty levered and you are wearing one side of the trade overnight (in between when you close out the winners and losers). I could see it going terribly wrong (in a very low probability scenario). And I could also see it working perfectly.

That's indeed an issue, because how much are most security pairs expected to move in less than a month? Probably not more than a few percent, so to generate a significant loss you have to take a lot of exposure. Probably more than prudent.

[klarmaniac]

Thanks for the suggestions everyone. My cpa's opinion was pretty close to ericopoly's, anything that is virtually 100% negatively correlated is a no-no (e.g. GOOG vs GOOGL, at the money puts and calls, etc). YHOO/BABA is legit but not highly correlated enough to be safe. Instead I've been buying small positions in a large number of companies that I liked anyway but that were just slightly more than I would've liked to pay. I can sell the ones that are down on 12/31 and sell the rest on 1/2. I'm counting on the market to be a voting machine rather than a weighing machine for the next three weeks, so that it's effectively coin tosses where "heads I win, tails I lose somewhat less."